Shake Shack Inc. — Q3 2017 Form 10-Q
Business context and period. The quarter ended September 27, 2017 (13 weeks); year-to-date covers 39 weeks. Shake Shack operated or licensed 143 Shacks: 79 domestic company-operated, 10 domestic licensed and 54 international licensed. The company owned 71.2% of SSE Holdings at quarter-end; results include non-controlling interests.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Total revenue | $94.6m | $74.6m | $262.7m | $195.2m |
| Shack sales | $91.1m | $71.9m | $253.3m | $188.4m |
| Operating income | $10.6m | $9.2m | $28.0m | $22.8m |
| Operating margin | 11.2% | 12.3% | 10.7% | 11.7% |
| Net income | $7.9m | $6.8m | $19.9m | $16.7m |
| Net income attributable to Shake Shack Inc. | $5.0m | $3.8m | $12.1m | $8.5m |
| Diluted EPS | $0.19 | $0.15 | $0.46 | $0.37 |
| Shack-level operating profit margin (non-GAAP) | 27.2% | 28.8% | 27.2% | 29.3% |
| Adjusted EBITDA (non-GAAP) | $18.2m | $15.2m | $49.7m | $38.8m |
Cash flow and liquidity. For the 39 weeks, operating cash flow was $54.0m, investing cash outflow was $41.5m (including $41.2m of property and equipment purchases), and financing cash inflow was $2.8m. Cash increased $15.3m to $26.9m. Marketable securities were $63.3m. The $50m revolving facility had no borrowings and $19.3m available after letters of credit; the company reported covenant compliance. Total liabilities were $368.2m, including $284.0m of obligations under the Tax Receivable Agreement (TRA) and $13.2m of deemed landlord financing.
Material changes and management commentary
- Q3 revenue rose 26.9%; Shack sales rose 26.8%, primarily reflecting 21 domestic company-operated openings since the comparable prior-year period and a menu price increase implemented in December 2016.
- Same-Shack sales fell 1.6% in Q3 and 1.9% year to date. Management attributed the decline mainly to traffic down 3.8%, partly offset by price and mix. The comparable base included 39 Shacks.
- Q3 operating income increased, but operating margin and Shack-level margin declined. Labor costs rose to 26.1% of Shack sales from 25.3%, reflecting wage increases, management investments and new Shacks at varying sales volumes. Other operating costs also increased as a share of Shack sales.
- Hurricane-related closures reduced Q3 sales by an estimated $0.3m; the company excluded comparable-period sales during those closures from its same-Shack calculation.
- Nine Shacks opened during Q3: four domestic company-operated and five licensed. The company also announced a partnership to enter Hong Kong, Macau and Shanghai.
Outlook, risks and unusual items
- Revised FY2017 outlook: revenue $354m–$355m; same-Shack sales decline of 1.5%–2%; 24–26 domestic company-operated openings; 18 net licensed openings; Shack-level operating margin 26.5%–27.0%; G&A $38m–$40m; depreciation $22m; interest expense $1.6m–$1.8m; adjusted pro forma effective tax rate 40%–41%.
- Preliminary FY2018 outlook called for 32–35 domestic company-operated openings and 16–18 net licensed openings. No revenue or earnings forecast was provided in this preliminary outlook.
- The company said cash from operations, cash on hand and revolver availability should fund operating needs and capital expenditures for at least 12 months. TRA payments are contingent on realizing tax benefits and sufficient future taxable income; the recorded TRA obligation was $284.0m.
- A new home-office lease signed in August 2017 has a 15-year initial term and minimum payments of $34.6m, with two five-year renewal options. Deemed landlord financing increased to $13.2m from $2.0m at year-end.
- A previously disclosed wage-and-hour settlement was paid in May 2017: $774,000 including related expenses. Other ordinary-course legal matters were described as not material; the filing reported no material change in risk factors.
- Management was evaluating new accounting standards. Adoption of the revenue standard was expected to change the timing of recognizing certain licensing opening and territory fees; the transition method had not been selected.
Important facts for investors to verify
- Whether traffic and same-Shack sales stabilize, and how comparable-store trends develop against the reported 39-Shack base.
- Whether planned store openings meet targets and generate expected sales and margins as the company expands into new markets.
- How labor, other operating costs and new-store mix affect Shack-level and GAAP operating margins.
- The cash timing and assumptions behind the $284.0m TRA obligation, including future taxable income and tax-benefit realization.
- The effects of the new home-office lease, deemed landlord financing and continuing capital expenditure needs on future cash flows.
Non-GAAP measures are management-defined supplemental measures and should be considered alongside, not instead of, GAAP results.